<PAGE>
 
                       U.S. SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C. 20549

                                     Form 10-KSB

(Mark One)
|X|    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 for the fiscal year ended December 31, 1998.

|_|   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934.

Commission file number:  0-21145

                                 COVALENT GROUP, INC.
                    (Name of small business issuer in its charter)

            Nevada                                       56-1668867
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

     One Glenhardie Corporate Center,                           19087
     1275 Drummers Lane, Suite 100,                           (Zip Code)
     Wayne, Pennsylvania 19087
(Address of principal executive offices)

Issuer's telephone number:  610-975-9533

Securities registered under Section 12(b) of the Exchange Act:  None.

Securities registered under Section 12(g) of the Exchange Act:

                            Common Stock, $.001 Par Value
                                   (Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|

State issuer's revenues for its most recent fiscal year: $9,390,620

The aggregate market value of the common stock held by non-affiliates as of
March 15, 1999 was $9,657,000.

As of March 15, 1999 there were 12,058,693 shares of common stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed with the Securities and
Exchange Commission relative to the Company's 1999 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.

Transitional Small Business Disclosure Format (check one):  Yes |_| No |X|


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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

      Covalent Group, Inc. (the "Company") through its subsidiary Covalent
Research Alliance Corp. ("CRA"), is a total research management organization
which designs and manages clinical trials in the drug and device development
process and with associated cost containment and quality of care components. CRA
specializes in Phase I through IV clinical trials and cost effectiveness and
outcomes studies for major customer groups such as pharmaceutical companies,
managed care organizations, insurers and employers. It offers a full array of
integrated services including study design, clinical trial monitoring and
management, data management, biostatistical analysis and regulatory affairs
services. CRA is structured to deliver customized high quality solutions to its
Fortune 500 and other clients.

      CRA utilizes its core expertise of clinical trials management to provide
high quality, clinical research and medical outcomes for its client base. In
addition, experience gained with more than 40 managed care organizations
facilitates designing and conducting clinical studies for pharmaceutical clients
in a managed care environment, thereby, improving the market potential for a
drug manufacturer's product. To aid its pharmaceutical and managed care
customers in clinical trials and outcomes research projects, CRA also has
developed several currently available proprietary products utilizing interactive
speech recognition technology including TeleTrial, a clinical trial management
system, and Virtual HouseCall, a disease assessment system.

      The Company was incorporated under the laws of the State of Nevada on
August 1, 1989 under the name of West End Ventures, Inc. ("West End"). West
End's only activity prior to the acquisition of its subsidiary, Future Medical
Technologies, Inc. ("FMT"), a New Jersey corporation incorporated on September
28, 1989 was the completion of its initial public offering on January 15, 1990.
On January 26, 1990, West End acquired 100% of the outstanding securities of
FMT.

      West End subsequently changed its name to Future Medical Technologies
International, Inc. ("FMTI"). On May 26, 1994, FMTI effected a one for five
reverse stock split. On February 22, 1995, the Company effected a five for seven
reverse stock split and completed the acquisition of 100% of the stock of CRA, a
Pennsylvania corporation, in exchange for 7,200,000 shares of post-split common
stock of FMTI.

      On September 20, 1996, FMTI shareholders ratified the disposition of 100%
of the stock of FMT, as of July 31, 1996. At the same time, shareholders
approved the change of the parent organization's name from Future Medical
Technologies International, Inc. to Covalent Group, Inc.

CRO Industry Overview

      The CRO industry provides independent product development services for the
pharmaceutical and biotechnology industries. Generally, CRO's derive
substantially all of their revenues from the research and development
expenditures of pharmaceutical and biotechnology companies. According to the
Pharmaceutical Researchers and Manufacturers of America, global pharmaceutical
and biotechnology industries spent an estimated $29 billion in 1998 on research
and development, of which the Company estimates $15 billion was spent on types
of services offered by the CRO industry. Of 


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this amount, approximately $3 billion was outsourced to CRO's.

      The Company believes that the following trends will lead to further growth
opportunities for CRO's as pharmaceutical and biotechnology companies continue
to increase outsourcing of product development needs: (i) price pressure by
managed care organizations and pharmacy managers on pharmaceutical companies is
forcing drug manufacturers to consolidate, down-size, and look to less expensive
fixed cost alternatives than internal development, principally outsourcing to
variable cost CRO's; (ii) pharmaceutical companies are seeking faster product
development times in order to maximize a new drug's patent and marketing
exclusivity; (iii) increasingly complex and stringent regulatory requirements
have increased the volume of data required for regulatory filings and increased
demands on data collection and analysis during the development process; (iv)
biotechnology companies are developing an increasing number of new drugs that
require regulatory approval and should continue to find CRO's to be a cost
effective alternative to building an internal drug development capability; and
(v) the need for sophisticated data management is increasing to expedite the
drug development process.

      The Company's only subsidiary, CRA has positioned its clinical development
services to capitalize on these market trends. As an additional element of its
strategy, CRA believes that it differentiates itself from other CRO's by
expertise in the design and execution of clinical studies which meet the
requirements of managed care and third party payors thereby enhancing the
marketability of clients' prescription drugs over their life cycle.

Business of the Company

      The Company provides a full range of CRO services specializing in clinical
studies that may also include various types of outcomes measurement. The Company
provides clinical trial management, data management, biostatistical analysis,
medical and regulatory services, health economics and outcomes research. The
Company provides its services mostly to large pharmaceutical companies. In 1998
the Company had 16 different clients, no one of which accounted for more than
24% of total revenues.

      The principal categories of services offered are:

Clinical Trials

      CRA utilizes over 100 full time and independent contractor personnel with
experience in the pharmaceutical, biotech and managed care industries that it
believes can support the needs of the most rigorous clinical trials or medical
outcomes studies. CRA has assembled an extensive network of clinical
investigators, managed care organizations, and clinical research specialists,
which it uses to coordinate and conduct clinical research. Clinical
investigators in the network are contracted for a specific clinical study, on a
case by case basis, where their expertise with a specific disease will insure
the highest quality medical care, treatment and clinical evaluation. CRA's
clinical monitors are strategically located throughout the country to reduce the
cost of travel to clinical or managed care sites. CRA's clinical trial services
include project coordination, regulatory document processing, monitoring
services and quality control review.

Data Management


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      CRA has automated the data management process associated with clinical
trials management through its use and customization of the industry standard
software from "BBN Software Products' Clintrial". Clintrial protocols are used
to assist in the collection, validations, and reporting of clinical results to
its pharmaceutical company clients as part of their submission to the Food and
Drug Administration ("FDA"), or other regulatory agencies. CRA's data management
professionals provide case report form review and tracking; data entry;
integrated clinical/statistical reports; and manuscripts for publication.

Biostatistics

      CRA also provides comprehensive clinical statistics support. CRA's
biostatisticians have extensive pharmaceutical/medical industry experience.
CRA's biostatistical services include clinical trials design; preparing
statistical analysis plans; representing clients at the FDA; and creating
statistical reports.

Medical and Regulatory Affairs Management

      CRA's medical and regulatory group provides liaison services between its
clients and regulatory agencies in the preparation, review and submission of
Investigational New Drug ("IND"), New Drug Application ("NDA"), 510k, and
Product License Application ("PLA") documents. CRA's medical services include
medical oversight of studies, review and interpretation of adverse experiences,
report writing and development of study protocols. Regulatory services include
strategy design, document preparation and client consultation.

Quality Assurance and Compliance

      CRA also provides field inspections that include investigator audits,
presubmission protocol compliance audits, Good Clinical Practice audits and
staff training.

Outcomes Research and Management

      CRA provides its clients retrospective database studies, therapeutic
end-point determinations, cost effectiveness studies, drug utilization reviews,
drug utilization effectiveness reviews, and health status survey development as
well as patient drug compliance programs, patient education programs and costs
containment studies.

Interactive Voice Recognition System

      CRA has developed several currently available proprietary products using
interactive voice recognition technology including TeleTrial, a clinical trial
management system, and Virtual HouseCall, a disease assessment system.

      Three standard TeleTrial modules have been developed for use in clinical
trials. They are the centralized subject enrollment and randomization module,
the drug allocation module, and the questionnaire/survey/patient diary module.

      o     The subject enrollment and randomization module provides centralized
            enrollment and 


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            randomization 24 hours per day, seven days per week. Study sites are
            able to randomize a patient, dispense drug at a visit, discontinue a
            patient, and review patient information. The standard module is
            designed to accommodate up to three strata and three treatment arms
            per strata.

      o     The drug allocation module is directly linked to the subject
            enrollment database and has the capability to track which clinical
            and drug supplies are available at the study site, which drugs
            should be dispensed according to the subject randomization, and the
            time interval between dispensing of drugs. A fax system provides
            hard copy reports which are used as source data at the study site or
            clinical pharmacy.

      o     The third module collects subjective patient data in the form of a
            questionnaire, survey, or a patient diary. This module is accessed
            by patients and makes use of the speech recognition interface.

      The TeleTrial system has been designed, built, tested and documented for
use in federally regulated clinical trials.

      Virtual HouseCall ("VHC"), as developed by CRA, is an interactive voice
recognition system that CRA believes excels in the type of data collection and
analysis required by healthcare industry segments focused on disease management.
Disease management is a comprehensive, integrated approach to care and
reimbursement with the goal of promoting maximum healthcare provider efficiency
and effectiveness. Data collection becomes key to continuing assessment of
disease management programs.

      VHC is a telephone-based service that has been designed to reach large
numbers of patients in a personalized and supportive manner. VHC automates the
administration of subjective quality of life surveys and psychosocial
assessments, provides patient access to disease specific educational and
resource libraries, and facilitates the publication of personalized reports
through on-demand printing services and faxes to healthcare providers and
patients.

Competition

      The Company competes primarily against internal research departments of
pharmaceutical companies and other CROs. The CRO industry is highly fragmented
with several hundred small, limited services providers, and seven larger firms
with revenues in excess of $50 million each, the largest of which are: Quintiles
Transnational Corp.; Covance, Inc.; and Pharmaceutical Product Development Inc.
These and some other competitors have substantially greater capital and
technical resources than the Company.

      Competitive factors that may influence a client's decision in choosing a
CRO include previous experience, references from existing clients, experience
with a particular type of project or area of clinical development, the quality
and timeliness of contract research, ability to recruit investigators and the
ability to provide a full range of services required by the client. The Company
believes it competes favorably in these respects.

Contractual Arrangements


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      Compensation for services is contracted at a fixed price, but may include
some variable components, and can cover a period of several months to several
years. A portion of the contract fee is typically paid when a clinical trial is
initiated and the contract provides for milestone payments throughout the
duration of the trial. Contracts can usually be terminated at any time by the
client, but are usually subject to termination fees. Contracts may be terminated
for a number of reasons including insufficient patient enrollment, unexpected
results in the clinical trial or a client's decision to terminate development of
a particular drug.

Backlog

      The Company's backlog consists of anticipated revenue from contracts that
have been signed but not yet completed. Once a project commences, revenue is
recognized over the life of the contract, which is consistent with industry
practice.

      As of December 31, 1998, the Company's backlog amounted to approximately
$26 million as compared to approximately $10 million at December 31, 1997. The
Company believes backlog at any given time is not necessarily a meaningful
indicator of future revenue. Clinical trials can be modified or terminated by
the client for any of the reasons mentioned above.

Potential Liability

      The Company attempts to manage its liability risk through contractual
indemnification provisions with clients and investigators hired by the Company
on behalf of its clients and through insurance. The contractual indemnifications
generally do not protect the Company against certain of its own actions such as
negligence. The contractual arrangements are subject to negotiation with clients
and the terms and scope of such arrangements vary from client to client and from
trial to trial. Although most of the Company's clients are large
well-capitalized companies, the financial performance of these indemnitors is
not secured. Therefore, the Company bears the risk that the indemnifying party
may not have the financial ability to fulfill its indemnification obligations.
The Company maintains professional liability insurance which includes drug
safety issues as well as data processing errors and omissions. The Company could
be materially and adversely affected if it were required to pay damages or incur
defense costs in connection with a claim that is beyond the scope of an
indemnity provision or beyond the level of insurance coverage or where the
indemnifying party does not fulfill its indemnification obligations. However,
the Company believes that its current insurance coverage is adequate.

Employees

      At December 31, 1998, the Company employed 50 full time personnel and
contracts with approximately 50 independent contractors on an as-needed basis.
None of the employees are represented by a labor union and the Company believes
its relations with employees and independent contractors are good.

ITEM 2. DESCRIPTION OF PROPERTY


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<PAGE>
 
      The CRA subsidiary is leasing approximately 11,800 square feet of
administrative and corporate offices from an independent third party at One
Glenhardie Corporate Center, 1275 Drummers Lane, Wayne, Pennsylvania for a
period of five years through December 2001 at a rental of $20,325 per month. The
Company subleases such offices from CRA for its corporate offices at a nominal
charge.

ITEM 3. LEGAL PROCEEDINGS

      None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 

      None.


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<PAGE>
 
                                         PART II

ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's Common Stock has been quoted in the Nasdaq Small Cap Market
since December 16, 1997 and was previously quoted in the over-the-counter market
on the OTC Bulletin Board under the symbol "CVGR". The following table indicates
the high and low bid price ranges of the Common Stock for each quarter within
the last two fiscal years.

              Quarterly Period Ended        High Bid      Low Bid
             ------------------------------------------------------

             1997
                    March 31               $5             $3   3/8
                    June 30                 5  13/16       3   1/4
                    September 30            5  15/16       4   1/4
                    December 31             4   7/16       3   5/8
             1998
                    March 31               $4   1/16      $2
                    June 30                 2  11/16       1
                    September 30            2  11/16           5/8
                    December 31             3   1/16       1 13/16


      Over-the-counter quotations set forth in the table above reflect
interdealer prices, without retail mark-up, mark-down or commission, and may not
necessarily reflect actual transactions. For the period from January 1, 1999 to
March 15, 1999 the high and low bid quotations for the Company's Common Stock
were $2 15/32 and $1 11/16. As of March 15, 1999 there were 618 holders of
record of the Company's Common Stock, however, the Company believes that there
is at least an additional 2,000 shareholders in "street name" who beneficially
own the Common Stock of the Company in various brokerage accounts.

      The Registrant has never declared a dividend and does not plan to do so in
the near future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION

        CAUTIONARY STATEMENT

      When used in this Report on Form 10-KSB and in other public statements,
both oral and written, by the Company and Company officers, the words
"estimate," "project," "intend," "believe," "anticipate" and similar expressions
are intended to identify forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position. Such statements are subject to risks and uncertainties that
could cause the Company's actual results and financial position to differ
materially. Such factors include, among others: (i) the Company's success in
attracting new business; (ii) the size, duration and timing of clinical trials;
(iii) the termination, delay or cancellation of clinical trials; (iv) the
intense competition in the industry in which the Company competes; (v) the
Company's ability to obtain financing on satisfactory terms; (vi) 


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<PAGE>
 
the sensitivity of the Company's business to general economic conditions; and
(vii) other economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices. The
Company undertakes no obligation to publicly release the result of any revision
of these forward-looking statements to reflect events or circumstances after the
date they are made or to reflect the occurrence of unanticipated events.

General

      CRA is a research management organization that designs, coordinates and
monitors clinical trials in drug development for some of the world's leading
pharmaceutical firms. In addition, using advanced technologies, the Company
works extensively in managed care, medical outcomes research and health
management programs that focus on compliance and provider/patient behavior
modification. Revenue is derived principally from the identification, placement,
monitoring and management of clinical development studies in the traditional
pharmaceutical, as well as managed care environment.

      Clinical research service contracts generally have terms ranging from
several months to several years. A portion of the contract fee is generally
payable upon execution of the contract, with the balance payable in installments
over the life of the contract. Revenues and related direct expenses are
recognized as specific contract terms are fulfilled under the percentage of
completion method.

      Contracts generally may be terminated by clients with or without cause.
Clinical trials may be terminated or delayed for several reasons, including
unexpected results or adverse patient reactions to the drug, inadequate patient
enrollment or investigator recruitment, manufacturing problems resulting in
shortages of the drug or decisions by the client to de-emphasize or terminate a
particular trial or development efforts on a particular drug. Depending on the
size of the trial in question, a client's decision to terminate or delay a trial
in which the Company participates could have a materially adverse effect on the
Company's backlog, future revenue and profitability.

Year 2000 Compliance

      The Company is taking the required steps to make its existing systems Year
2000 compliant at a total estimated cost of $50,000; $25,000 of which has
already been incurred through December 31, 1998 and $25,000 of which is expected
to be incurred in fiscal 1999. The Company believes it is on schedule to
complete its remediation efforts by September 1999. If such efforts are not
completed timely, the Year 2000 issue is not expected to have a material impact
on the clinical operations of the Company because all work currently being
performed on the Company's present clinical trials data management system is
scheduled to be completed by December 31, 1999. Furthermore, the Company in 1999
purchased a new clinical trial data management system capable of handling large
scale projects with greater flexibility which is Year 2000 compliant. See
-"Liquidity and Capital Resources".

The Company's efforts are focused on Year 2000 compliance in the following four
principal areas:

      1.    Application software, including operating systems and applications
            for network servers, midranges and personal computers;
      2.    Network and communication software, including business offices and
            field locations;
      3.    Computer equipment, including network servers, midranges and
            personal computers; and
      4.    Telecommunications equipment, including telephone and voice mail.


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<PAGE>
 
      These activities are intended to encompass all major categories of systems
in use by the Company, including sales, research and trial conduct operations
and human resources.

      The general phases of the Year 2000 Project are: (1) Year 2000 methodology
training for key information technology personnel, (2) inventorying Year 2000
items, internally and externally; (3) assigning priorities to identified items;
(4) assessing the Year 2000 compliance of items determined to be material to the
Company; (5) remediating or replacing material items that are determined not to
be Year 2000 compliant; (6) testing material items; and (7) designing and
implementing contingency plans to the extent deemed necessary. The Company has
completed phases (1), (2), (3) and (4) and is presently conducting phases (5),
(6) and (7). The Company's computers, local area network servers, software, and
digital phone system have all been purchased within the last three years, and an
inventory has been conducted in order to identify those systems and software
that may require Year 2000 remediation. Assessment and testing is ongoing as
hardware or system software is remediated, upgraded or replaced. In anticipation
of its being Year 2000 compliant by September 1999, the Company has not yet
designed contingency plans in the case that it is not Year 2000 compliant by the
turn of the century. The Company will monitor its Year 2000 compliance progress
and adjust the implementation of the phases and the necessity of contingency
planning as it deems appropriate.

      In addition to making its own systems Year 2000 ready, the Company has and
will continue to survey its key suppliers and clients to determine the extent to
which the systems of such suppliers and clients are Year 2000 compliant and the
extent to which the Company could be affected by the failure of such third
parties to be Year 2000 compliant. Based upon the response to date, the Company
cannot presently estimate the impact of the failure of such third parties to be
Year 2000 compliant.

      The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations such as the Company's ability to properly conduct a particular trial
or otherwise provide necessary service to its clients. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000 readiness
of third-party suppliers and clients, the Company is unable to determine at this
time whether the consequences of Year 2000 failures will have a material impact
on the Company's results of operations, liquidity or financial condition. The
Year 2000 assessment being conducted by the Company is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 problem. The
Company believes that its exposure to the Year 2000 problem will be minimal.

      All research indicates that the Company's exposure to this problem will be
minimal.

Results of Operations

      Year ended December 31, 1998 compared to Year ended December 31, 1997.

      Revenues in 1998 were $9,391,000 and represent services performed for 16
different clients compared to $11,803,000 in 1997 representing services for 17
different clients. In 1998 and 1997 no single client accounted for more than 24%
of total revenues in either year. Although the number of projects worked on in
both years was identical, the decline in revenues from 1997 to 1998 is primarily
attributable to smaller value contracts for clinical trials.


                                       10
<PAGE>
 
      Direct expenses include compensation and other expenses directly related
to conducting clinical studies. These costs decreased by $1,967,000 from
$8,222,000 to $6,255,000 for the years ended December 31, 1997 and 1998,
respectively. As a percentage of revenues, direct expenses decreased from 70%
for the year ended December 31, 1997 to 67% for the year ended December 31,1998.
The decrease in relative percent is due to different cost structures of clinical
studies based on work requested by the Company's clients in 1998. In 1998, the
mix of work requested by the Company's clients resulted in higher margins as
compared to 1997.

      Selling, general and administrative expenses include all administrative
and business development personnel, and all other support expenses not directly
related to specific contracts. Also included are expenses associated with the
development of an interactive voice recognition system, the platform development
of which was essentially completed in January 1998. Selling, general and
administrative expenses for the year ended December 31, 1998 amounted to
$4,162,000 as compared to $3,615,000 for the prior year, or an increase of
$547,000. The increase in expenses consists primarily of costs associated with
hiring additional personnel necessary to staff new business obtained late in
1998, additional business development personnel, and settlement expenses of
$229,000 with two former executives of the Company. As a percentage of revenues,
selling, general and administrative expenses increased from 31% to 44% for the
years ended December 31, 1997 and 1998, respectively. The increase in such
expenses as a percentage of revenues resulted primarily from the decrease in
revenues.

      Investment loss of $397,000 represents the write down to market value of
300,000 shares of ABS Group, Inc. common stock held by the Company. The stock
was received as partial payment in the sale of the FMT subsidiary in 1996.

      Interest income decreased $11,000 from $110,000 for the year ended
December 31, 1997 to $99,000 for the year ended December 31, 1998.

      Income tax benefit for the year ended December 31, 1998 amounted to
$382,000, which represents an effective tax rate of 29%. The effective tax rate
is below the Federal Statutory rate due to certain non tax deductible expenses
recorded in 1998. As of December 31, 1998, the Company recorded a net deferred
tax asset of $475,000 which includes the current year income tax benefit. Based
on an assessment of the Company's taxable earnings history and expected future
taxable income, management has determined that it is more likely than not that
the net deferred tax asset will be realized in future periods. The Company may
be required to provide a valuation allowance for this asset in the future if it
does not generate sufficient taxable income as planned. Additionally, the
ultimate realization of this asset could be negatively impacted by market
conditions and other variables not known at this time.

      Year ended December 31, 1997 compared to Year ended December 31, 1996.

      Revenues in 1997 were $11,803,000 and represent services performed for 17
different clients compared to $10,352,000 in 1996 representing services for 11
different clients. In 1997 no single client accounted for more than 21% of total
revenues as compared to 1996 when one pharmaceutical customer accounted for 76%
of the Company's revenues.

      Direct expenses include compensation and other expenses directly related
to conducting clinical studies. These costs increased by $1,891,000 from
$6,331,000 to $8,222,000 for the years ended 


                                       11
<PAGE>
 
December 31, 1996 and 1997, respectively. As a percentage of revenues, direct
expenses increased from 61% for the year ended December 31, 1996 to 70% for the
year ended December 31, 1997. The increase in relative percent is due to
different cost structures of the studies based on the work requested by the
Company's clients in 1997. In 1997, the mix of work requested by the Company's
clients happened to be lower margin work as compared to 1996. The Company's
fixed costs necessary to support its volume of clinical trials also increased in
1997, primarily as a result of increased personnel costs.

      Selling, general and administrative expenses include all administrative
personnel and business development, and all other support expenses not directly
related to specific contracts. Also included are expenses related to the
development of an interactive voice recognition system. Selling, general and
administrative expenses for the year ended December 31, 1997 amounted to
$3,615,000 as compared to $3,136,000 for the year ended December 31, 1996, or an
increase of $479,000. The increase consists of $169,000 related to voice
recognition system development whose total expenditures in the year 1997
amounted to $1,052,000 compared to total expenditures in 1996 of $883,000. The
remainder of the increase of $310,000 is due to the overall expansion of the
business and costs associated with building the necessary support
infrastructure. As a percent of revenues, selling, general and administrative
expenses increased from 30% to 31% for the years ended December 31, 1996 and
1997, respectively.

      Investment gain of $197,000 represents the gain recognized as a result of
the exchange of a note receivable of $225,000 and related accrued interest of
$13,000 for 300,000 shares of ABS Group, Inc. Common Stock.

      Interest income increased $16,000 from $94,000 for the year ended December
31, 1996 to $110,000 for the year ended December 31, 1997.

      The provision for income taxes amounted to $114,000 (before recording the
income tax benefit of $94,000 on the sale of FMT) for the year ended December
31, 1997 and is net of a federal tax credit applicable to qualified research
expenses and an adjustment to the income tax benefit of prior period net
operating loss. In 1997, the Company reached agreement with the purchaser to
treat the sale of FMT as an asset sale under Internal Revenue Code Section 338
(h) (10). Accordingly, the loss on the disposition of FMT is deductible for tax
purposes against future income. As a result, during the first quarter of 1997,
the Company recorded an additional deferred tax asset of $94,000. Management
anticipates the loss on disposal to be fully utilized. As a result, the net
income tax benefit recorded for the year ended December 31, 1997 was $20,000.

Liquidity and Capital Resources

      The Company's contracts usually require a portion of the contract amount
to be paid at the time the contract is initiated. Additional payments are
generally made upon completion of negotiated performance requirements throughout
the life of the contract. Cash receipts do not necessarily correspond to costs
incurred and revenue recognized for most contracts (revenue recognition is based
on the percentage of completion accounting method). The Company typically
receives a low volume of large-dollar receipts. As a result, the number of days
outstanding in accounts receivable will fluctuate due to the timing and size of
cash receipts. Compared to December 31, 1997, accounts receivable increased
$399,000 to $2,534,000 at December 31, 1998 primarily due to the timing of
progress payments for clinical trials. Cost and estimated earnings in excess of
related billings on 


                                       12
<PAGE>
 
uncompleted contracts decreased $805,000 to $603,000 at December 31, 1998. The
decrease was due to the final billings on two completed contracts during the
month of December 1998. Accounts payable increased $260,000 to $2,063,000 at
December 31, 1998 due to an overall increase in payments due to investigator
sites. These contractual payments are based on completing certain milestones
during the clinical study. Investigator fees are therefore accrued based on work
completed and paid at a later date. Billings in excess of related costs and
estimated earnings on uncompleted contracts increased $551,000 to $1,290,000 at
December 31, 1998 due primarily to advanced billings on recent contracts.

      The Company's cash and cash equivalents balance at December 31, 1998 was
$1,209,000 as compared to $1,795,000 at December 31, 1997. The decrease in cash
was due to the funding of the Company's operating loss for the year.

      The Company purchased $280,000 of equipment in 1998 as compared to
$335,000 in 1997. Purchases in 1998 were primarily for computers and office
equipment. The Company anticipates the need for significant capital expenditures
in 1999 for the purchase and validation of an additional data management system
estimated to cost $500,000.

      The Company has a line of credit with a commercial bank providing a
maximum credit facility of $1 million which bears interest at a rate not to
exceed 1% point above the bank's prime rate. Borrowings outstanding under the
credit line are secured by substantially all of the assets of the Company. No
borrowings were outstanding under the credit line at December 31, 1998.

      The Company's principal cash needs on both a short and long-term basis are
for the funding of its operations, and capital expenditure requirements. The
Company expects to continue expanding its operations through internal growth,
expansion of its existing services, and the development of new service products
for clinical research and the healthcare industry. The Company expects such
activities to be funded from existing cash and cash equivalents and cash flow
from operations.

      Management believes that the Company's operations and financial results
are not materially affected by inflation.

ITEM 7. FINANCIAL STATEMENTS

      The Company's consolidated financial statements listed below are contained
herein beginning at page F-1:

            (a) Consolidated Financial Statements

            Report of Independent Public Accountants                    F-1
            Consolidated Balance Sheets -                               F-2
                December 31, 1998 and 1997
            Consolidated Statements of Operations - Years Ended         F-4
                December 31, 1998 and 1997
            Consolidated Statements of Stockholders' Equity - Years     F-5
                Ended December 31, 1998 and 1997
            Consolidated Statements of Cash Flows - Years Ended         F-6
                December 31, 1998 and 1997
            Notes to Consolidated Financial Statements                  F-7


                                       13
<PAGE>
 
            (b) Consolidated Financial Statements Schedules

            All schedules have been omitted because either they are not required
            or are not applicable or because the required information has been
            included elsewhere in the Consolidated Financial Statements or the
            notes thereto.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

      None.


                                       14
<PAGE>
 
                                        PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

The following are the Executive Officers and Directors of the Company.

Name                    Age   Position(s) Held with Company

Bruce LaMont            47    President, Chief Executive Officer, Director

Kenneth M. Borow, M.D.  50    Chief Medical Officer, Director

David Weitz             48    Secretary, Treasurer

William K. Robinson     59    Chief Financial Officer, Director

Ivan Rubin              59    Director

John J. Whittle         63    Director

Management Biographies

      Brief biographies of the Directors and Officers of the Company are set
forth below. All Directors are elected annually and hold office until the next
annual stockholders meeting or until their earlier resignation, retirement,
removal, disqualification, death or until their successors have been elected and
qualified. Vacancies in the existing Board are filled by majority vote of the
remaining Directors. Officers of the Company serve at the will of the Board of
Directors.

      Bruce LaMont, President, Chief Executive Officer and Director of the
Company. In 1993, Mr. LaMont founded CRA. He has over 15 years experience in the
pharmaceutical industry. From 1980 to 1993, Mr. LaMont worked at Merck Research
Laboratories, where he was the Medical Program Liaison of Marketing and Clinical
Development of Merck Human Health Division, and where he designed, coordinated
and managed clinical trials for NDA submission. He also coordinated projects
with marketing, promotion, advertising, legal, manufacturing and regulatory
departments to ensure proper achievement of study objectives and implemented
clinical development database providing a liaison capacity between marketing and
clinical research and development. Mr. LaMont received an Executive MBA and a
Masters in Pharmaceutics from Temple University and also holds a B.S. in Biology
from Villanova University. In addition, Mr. LaMont has extensive research
experience in Gastroenterology, Drug Metabolism, Neurosurgery, Obstetrics and
Gynecology. He has held research positions at both the University of
Pennsylvania and the Medical College of Pennsylvania.

      Kenneth M. Borow, M.D., Chief Medical Officer and Director joined the
Company in 1997. For the previous four years, Dr. Borow was Senior Director,
Medical Research Associates Department, Merck Research Laboratories where he
directed clinical research operations for 163 different protocols, and developed
a Merck-based contract group consisting of field monitors, data coordinators and
statisticians. Previously, he was a Professor of Medicine and Pediatrics at the
University of Chicago, and originator of a worldwide clinical research program
in cardiac function which included 


                                       15
<PAGE>
 
investigative sites in the United States, United Kingdom, Norway, Israel and
South Africa. Dr. Borow graduated from the Temple Medical School in 1974. Dr.
Borow is a Harvard-trained Internist, Pediatrician, Adult Cardiologist and
Pediatric Cardiologist

      David Weitz, Secretary and Treasurer of the Company. In 1995, Mr. Weitz
was appointed the Chief Information Officer of CRA. He is responsible for the
planning, implementation, and use of information technologies. Prior to January
1995 and since 1985, he was the Manager of Technical Support and Training for
Merck Research Laboratories where he was responsible for planning, implementing
and operating a computer technical support program and computer application
training program for all divisional employees located at 5 geographical
locations.

      William K. Robinson, Chief Financial Officer and Director, joined the
Company in 1996. He has over 25 years of diverse healthcare management
experience, both domestic and international, in large corporate and emerging
company operations. From 1994 to June 1996, he was Vice President of Finance for
Scott Specialty Gases, Inc., a manufacturer of calibration and medical gases. He
was President and Chief Executive Officer of Tektagen, Inc., a biopharmaceutical
testing laboratory from 1991 to 1994, and Chief Financial Officer from 1990 to
1991. Previously, he was employed by SmithKline Beckman for 17 years, where he
held the top financial positions in the U.S. Pharmaceuticals, Clinical
Laboratories and Animal Health Divisions.

      Ivan Rubin, Director. Mr. Rubin has served as a Director since 1997. He is
President of Beta Associates, a health information consulting firm. From 1994 to
April 1996, Mr. Rubin was a principal of Corporate Outsourcing Group, a health
information consulting firm. From September 1993 to April 1994, Mr. Rubin was an
independent business consultant. Prior thereto, Mr. Rubin held various positions
at Merck & Co., the last being Vice President, Business Planning, Development
and Research. Mr. Rubin holds a B.A. from the University of Buffalo and an
M.B.A. from Hofstra University.

      John J. Whittle, Director. Mr. Whittle has served as a Director since
1996. He is Chairman, President, and Chief Executive Officer of Farmers &
Traders Life Insurance Company in Syracuse, New York. Prior to joining Farmers &
Traders in 1989, he held senior management positions with Mutual of New York and
served on the Boards of several of their subsidiaries. Mr. Whittle received a
Masters in Management from The American College and also holds a B.S. in
Insurance from Pennsylvania State University. He is a Chartered Life Underwriter
(CLU).

Section 16(a) Beneficial Ownership Reporting Compliance

      Based solely upon a review of copies of reports furnished to the Company
during the fiscal year ended December 31, 1998, the following person filed the
number of late reports or failed to file reports representing the number of
transactions set forth after his name: John J. Whittle, one transaction.

ITEM 10. EXECUTIVE COMPENSATION

Information concerning Executive Compensation is incorporated herein by
reference to the similarly titled section in the Company's definitive proxy
materials for the Company's 1999 Annual Meeting of Stockholders.


                                       16
<PAGE>
 
ITEM 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      None for the fiscal year ended December 31, 1998.

ITEM 12. EXHIBITS

      (a) Exhibits

            3.1   Certificate of Incorporation of West End Ventures, Inc. (a
                  predecessor to the Company) and all amendments thereto, a
                  Nevada corporation.(1)

            3.2   Bylaws of Covalent Group, Inc.

            10.1  1996 Stock Option Plan. (2)

            10.2  1995 Stock Option Plan. (3)

            10.3  Lease between Dean Witter Realty Income Partnership II and
                  Covalent Group, Inc. dated November 14, 1996. (3)

            10.4  Credit Agreement with First Union Bank dated April 25, 1997.
                  (1)

            10.5  Stock Purchase Warrant Agreement between Berkshire
                  International Finance, Inc. and the Company dated June 20,
                  1996. (4)

            10.6  Stock Purchase Warrant Agreement between S&F Consulting, Inc.
                  and the Company dated June 20, 1996. (5)

            10.7  Stock Purchase Warrant Agreement between S&F Consulting, Inc.
                  and the Company dated May 8, 1996. (6)

            21    Subsidiaries of the Registrant.(3)

            23    Consent of Arthur Andersen LLP

            27    Financial Data Schedule (in electronic format only).

      (b) Form 8-K

            On December 23, 1998 the Company reported on Form 8-K it entered
            into a multi-year contract to conduct a clinical development study
            with an estimated value of $4 million.

            On November 10, 1998 the Company reported on Form 8-K it entered
            into a multi-year contract to conduct a clinical development study
            with an estimated value of $13.6 million.

----------
(1)   Filed as an exhibit, to the Company's Amendment No. 1 to its Report Form
      10-KSB (No. 0-21145) filed with the Securities & Exchange Commission on
      July 15, 1998 and incorporated herein by reference.

(2)   Incorporated by reference from Proxy Statement for 1996 Annual Meeting.

(3)   Filed as an exhibit to the Company's Report on Form 10-KSB (No. 0-21145)
      filed with the Securities and Exchange Commission on March 30, 1998 and
      incorporated herein by reference.

(4)   Incorporated by reference to Exhibit 4.1 to the Company's Amendment No. 1
      to Form S-3 filed July 15, 1998 (File No. 333-51079).

(5)   Incorporated by reference to Exhibit 4.2 to the Company's Amendment No. 1
      to Form S-3 filed July 15, 1998 (File No. 333-51079).

(6)   Incorporated by reference to Exhibit 4.3 to the Company's Amendment No. 1
      to Form S-3 filed July 15, 1998 (File No. 333-51079).


                                       17
<PAGE>
 
                              COVALENT GROUP, INC.
                        CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 1998 AND 1997

                                      INDEX

                                                                     Page
                                                                     ----

Report of Independent Public Accountants                             F-1

Consolidated Balance Sheets                                          F-2

Consolidated Statements of Operations                                F-4

Consolidated Statements of Stockholders' Equity                      F-5

Consolidated Statements of Cash Flows                                F-6

Notes to Consolidated Financial Statements                           F-7
<PAGE>
 
                     REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Covalent Group, Inc.:

We have audited the accompanying consolidated balance sheets of Covalent Group,
Inc. (a Nevada corporation) and subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Covalent Group, Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.


                                                Arthur Andersen LLP

Philadelphia, Pa.,
   February 19, 1999


                                      F-1
<PAGE>
 
                              Covalent Group, Inc.
                                 and Subsidiary
                           Consolidated Balance Sheets

     Assets                                                 December 31,
                                                            ------------
<TABLE>
<CAPTION>
                                                         1998           1997
                                                         ----           ----
<S>                                                  <C>            <C>        
Current Assets
   Cash and cash equivalents                         $ 1,208,956    $ 1,794,530
   Restricted cash                                     1,000,000             --
   Accounts receivable                                 2,534,283      2,135,223
   Prepaid expenses and other                            295,689        170,934
   Costs and estimated earnings in excess of
     related billings on uncompleted contracts           603,226      1,407,933
                                                     -----------    -----------
            Total Current Assets                       5,642,154      5,508,620
                                                     -----------    -----------

Property and Equipment
   Equipment                                             977,018        814,230
   Furniture and fixtures                                249,851        186,905
   Leasehold improvements                                115,391         59,441
                                                     -----------    -----------
                                                       1,342,260      1,060,576
           Less - Accumulated depreciation              (600,003)      (372,441)
                                                     -----------    -----------

                  Net Property and Equipment             742,257        688,135
                                                     -----------    -----------

Deferred Income Taxes                                    475,239         91,940
                                                     -----------    -----------
Other Assets                                              59,165        445,898
                                                     -----------    -----------

Total Assets                                         $ 6,918,815    $ 6,734,593
                                                     ===========    ===========
</TABLE>

                     The accompanying notes are an integral
                 part of these consolidated financial statements


                                      F-2
<PAGE>
 
                              Covalent Group, Inc.
                                 and Subsidiary
                           Consolidated Balance Sheets

   Liabilities and Stockholders' Equity

<TABLE>
<CAPTION>
                                                             December 31,
                                                             ------------
                                                          1998           1997
                                                      -----------    -----------
<S>                                                   <C>            <C>
Current Liabilities
      Accounts payable                                $ 2,062,564    $ 1,803,057
      Accrued expenses                                    295,452         98,419
      Billings in excess of related costs and
        estimated earnings on uncompleted contracts     1,289,970        739,113
                                                      -----------    -----------

               Total Current Liabilities                3,647,986      2,640,589
                                                      -----------    -----------

   Commitments and Contingencies (Note 10)
   Stockholders' Equity
      Common stock,  $.001 par value per
         share, 25,000,000 shares authorized,
         12,071,193 and 11,755,709 shares issued
         respectively                                      12,071         11,756
      Additional paid-in-capital                        9,384,135      9,265,508
      Accumulated deficit                              (6,075,061)    (5,132,944)
                                                      -----------    -----------
                                                        3,321,145      4,144,320
         LESS:
            Treasury stock, at cost, 12,500 shares        (50,316)       (50,316)
                                                      -----------    -----------

               Total Stockholders' Equity               3,270,829      4,094,004
                                                      -----------    -----------

   Total Liabilities and Stockholders' Equity         $ 6,918,815    $ 6,734,593
                                                      ===========    ===========
</TABLE>

                     The accompanying notes are an integral
                 part of these consolidated financial statements


                                      F-3
<PAGE>
 
                              Covalent Group, Inc.
                                 and Subsidiary
                      Consolidated Statements Of Operations

                                                     Years Ended December 31,
                                                     ------------------------
                                                       1998             1997
                                                       ----             ----

Revenues                                         $  9,390,620      $ 11,803,334

Operating Expenses
    Direct                                          6,254,481         8,222,217
    Selling, general and administrative             4,162,486         3,615,186
                                                 ------------      ------------

Total Operating Expenses                           10,416,967        11,837,403
                                                 ------------      ------------

Loss from Operations                               (1,026,347)          (34,069)

Gain (Loss) from Investment                          (397,312)          196,687

Interest Income                                        99,542           109,893
                                                 ------------      ------------

Income (Loss) before Income Taxes                  (1,324,117)          272,511

Income Tax Provision (Benefit)                       (382,000)           19,815
                                                 ------------      ------------

Net Income (Loss)                                $   (942,117)     $    252,696
                                                 ============      ============

Net Income (Loss) per Common Share
  Basic                                          $       (.08)     $        .02
  Diluted                                        $       (.08)     $        .02

Weighted Average Common and Common
  Equivalent Shares Outstanding
    Basic                                          11,808,306        11,659,890
    Diluted                                        11,808,306        12,398,172

                         The accompanying notes are an integral
                    part of these consolidated financial statements


                                      F-4
<PAGE>
 
                              COVALENT GROUP, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                            Unrealized
                                  Common Stock      Additional              Holding          Treasury Stock
                               ------------------   Paid-In    Accumulated  Loss on      -----------------------
                                Shares    Amount    Capital     Deficit     Investment     Shares       Amount        Total
                               --------  --------  ---------  -----------   ---------    ----------   ----------   ----------
<S>                          <C>         <C>      <C>         <C>           <C>           <C>          <C>         <C>        
BALANCE,
  DECEMBER 31, 1996          11,602,715  $11,603  $9,083,632  $(5,385,640)  $      --     $     --     $      --   $ 3,709,595

Net income                           --       --          --      252,696          --           --            --       252,696
Exercise of stock options       152,994      153     140,592           --          --           --            --       140,745
Stock options granted to
  consultant                         --       --      41,284           --          --           --            --        41,284
Purchase of common stock
  for treasury                       --       --          --           --          --      (12,500)      (50,316)      (50,316)
                             ----------  -------  ----------  -----------   ---------     --------     ---------    ----------

BALANCE,
  DECEMBER 31, 1997          11,755,709   11,756   9,265,508   (5,132,944)         --     $(12,500)      (50,316)    4,094,004

Comprehensive loss:
Net loss                             --       --          --     (942,117)         --           --            --      (942,117)
Unrealized loss on
  investment                         --       --          --           --    (397,312)          --            --      (397,312)
Realized loss on investment          --       --          --           --     397,312           --            --       397,312
                                                                                                                    ----------
Total comprehensive loss             --       --          --           --          --           --            --      (942,117)
Exercise of stock options       315,484      315      99,877           --          --           --            --       100,192
Capital contribution                 --       --      18,750           --          --           --            --        18,750
                             ----------  -------  ----------  -----------   ---------     --------     ---------    ----------
BALANCE,
  DECEMBER 31, 1998          12,071,193  $12,071  $9,384,135  $(6,075,061)  $      --     $     --     $(50,316)    $3,270,829
                             ==========  =======  ==========  ===========   =========     ========     =========    ==========
</TABLE>

                     The accompanying notes are an integral
                 part of these consolidated financial statements


                                      F-5
<PAGE>
 
                              Covalent Group, Inc.
                                 and Subsidiary
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                Years Ended December 31,
                                                                ------------------------
                                                                 1998              1997
                                                             -----------       -----------
<S>                                                          <C>               <C>        
Operating Activities:
Net income (loss)                                            $  (942,117)      $   252,696
Adjustments to reconcile net income (loss) to
    net cash provided by (used in) operating activities
      Amortization and depreciation                              225,562           171,100
      Investment loss (gain)                                     397,312          (196,687)
      Stock options issued to consultants                             --            41,284
      Deferred income taxes                                     (383,299)            4,423
      Non cash capital contribution                               18,750                --
      Changes In assets and liabilities
       (Increase) decrease in -
        Restricted cash                                       (1,000,000)               --
        Accounts receivable                                     (399,060)          992,325
        Prepaid expenses and other                              (124,755)           (8,285)
        Costs and estimated earnings in excess
          of related billings on uncompleted contracts           804,707        (1,401,690)
        Other assets                                             (10,579)          (40,857)
       Increase (decrease) in -
        Accounts payable                                         259,507         1,115,126
        Accrued expenses                                         197,033            89,852
        Billings in excess of related costs and
          estimated earnings on uncompleted contracts            550,857           153,245
                                                             -----------       -----------

Net Cash (Used In) Provided By Operating Activities             (406,082)        1,172,532
                                                             -----------       -----------

Investing Activities:

Purchase of property and equipment                              (279,684)         (335,441)
                                                             -----------       -----------

Net Cash Used In Investing Activities                           (279,684)         (335,441)
                                                             -----------       -----------

Financing Activities:

Proceeds from exercise of stock options                          100,192            85,745

Purchase of treasury stock                                            --           (50,316)
                                                             -----------       -----------

Net Cash Provided By Financing Activities                        100,192            35,429
                                                             -----------       -----------

Net (Decrease) Increase In Cash and Cash Equivalents            (585,574)          872,520

Cash and Cash Equivalents, Beginning of Year                   1,794,530           922,010
                                                             -----------       -----------

Cash and Cash Equivalents, End of Year                       $ 1,208,956       $ 1,794,530
                                                             ===========       ===========
</TABLE>

                        The accompanying notes are an integral
                   part of these consolidated financial statements


                                      F-6
<PAGE>
 
                              Covalent Group, Inc.
                                 And Subsidiary
                   Notes To Consolidated Financial Statements

1. DESCRIPTION OF BUSINESS:

      Covalent Group, Inc. (the Company), formerly Future Medical Technologies
      International, Inc. (FMTI), is a contractual research organization,
      providing clinical research and development services to pharmaceutical,
      biotechnology, medical service and managed care organizations. The Company
      initiates, designs and monitors clinical trials, manages and analyzes
      clinical data and offers other related services and products.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

      Principles of Consolidation

      The consolidated financial statements include the accounts of the Company
      and its wholly owned subsidiary. Intercompany transactions and balances
      have been eliminated in consolidation.

      Use of Estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the
      financial statements and the reported amounts of revenues and expenses
      during the period. Actual results could differ from those estimates.

      Revenue Recognition

      Fixed price contract revenue is recognized based on the status of the work
      completed under the contract as of a given time based on the various tasks
      required under the contract using the percentage of completion method.
      Revenue from other contracts is recognized as services are provided.
      Revenue related to contract modifications is recognized when realization
      is assured and the amounts are reasonably determinable. Adjustments to
      contract cost estimates are made in the periods in which the facts which
      require the revisions become known. When the revised estimate indicates a
      loss, such loss is provided for currently in its entirety. Costs and
      estimated earnings in excess of related billings on uncompleted contracts
      represents revenue recognized in excess of amounts billed. Billings in
      excess of related costs and estimated earnings on uncompleted contracts
      represents amounts billed in excess of revenue recognized.

      Cash and Cash Equivalents

      The Company considers all highly liquid debt instruments purchased with an
      original maturity of three months or less to be cash equivalents.

      Restricted Cash

      The Company received an advance payment from one of its customers as part
      of a long term contract, which includes a separate restricted cash account
      to be utilized for payment of investigator fees. As of December 31, 1998,
      this restricted cash amount was $1,000,000 and this amount is also
      included in accounts payable.


                                      F-7
<PAGE>
 
      Property and Equipment

      Property and equipment are recorded at cost. Depreciation is provided
      using the straight line method over the estimated useful lives of the
      assets which range from 3 to 7 years for equipment, from 3 to 7 years for
      furniture and fixtures and the remaining lease term for leasehold
      improvements. Depreciation expense for the years ended December 31, 1998
      and 1997 was $225,562 and $171,100 respectively. Expenditures for
      maintenance and repairs are charged to expense as incurred. When assets
      are sold or retired, the cost and accumulated depreciation are removed
      from the accounts and any gain or loss is included in income.

      Investments

      Included in other assets is an investment in 300,000 shares of Common
      stock of ABS Group, Inc. (see Note 3). The investment has been classified
      as long--term due to certain restrictions on the sale of this stock. This
      investment is carried at the closing bid price per share with a minimal
      discount due to the restrictions regarding the ability to sell this stock.
      The investment is classified as available for sale pursuant to Statement
      of Financial Accounting Standards No. 115 "Accounting for Certain
      Investments in Debt and Equity Securities" (SFAS No. 115). Therefore any
      unrealized holding gains or losses will be presented as a separate
      component of stockholders' equity. The carrying value of this investment
      at December 31, 1998 is $37,500.

      Income Taxes

      The Company accounts for income taxes under Statement of Financial
      Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109)
      which requires the liability method of accounting for deferred income
      taxes. Deferred tax assets and liabilities are determined based on the
      difference between the financial statement and tax bases of assets and
      liabilities. Deferred tax assets or liabilities at the end of each period
      are determined using the tax rate expected to be in effect when taxes are
      actually paid or recovered.

      Concentration of Credit Risk

      Financial instruments that potentially subject the Company to
      concentration of credit risk are accounts receivable and the Company's
      customer base principally comprises companies within the pharmaceutical
      industry. The Company does not require collateral from its customers.

      Fair Value of Financial Instruments

      The Company's financial instruments consist primarily of cash and cash
      equivalents, accounts receivable, costs and estimated earnings in excess
      of related billings on uncompleted contracts, accounts payable and
      billings in excess of related costs and estimated earnings on uncompleted
      contracts. The book values of cash and cash equivalents, accounts
      receivable, costs and estimated earnings in excess of related billings on
      uncompleted contracts, accounts payable and billings in excess of related
      costs and estimated earnings on uncompleted contracts are considered to be
      representative of their respective fair values.

      Net Income (Loss) Per Common and Common Equivalent Share

      Basic net income (loss) per Common share was computed by dividing net
      income (loss) by the weighted average number of shares of Common stock
      outstanding during the period. Diluted net 


                                      F-8
<PAGE>
 
      income per Common share for the year ended December 31, 1997 reflects the
      potential dilution from the exercise of outstanding stock options and
      warrants into Common stock. Inclusion of shares of Common stock
      potentially issuable upon the exercise of stock options and warrants in
      calculating diluted net loss per Common share for the year ended December
      31, 1998, would have been anti dilutive, and therefore such shares were
      not included in the calculation.

      The net income (loss) and weighted average common and common equivalent
      shares outstanding for purposes of calculating net income (loss) per
      common share are computed as follows:

                                                            Years Ended
                                                            December 31,
                                                            ------------
                                                       1998              1997
                                                       ----              ----

    Net income (loss) used for basic
      and diluted  net income (loss)
      per common share                            $   (942,117)      $   252,696
                                                  ============       ===========

    Weighted average common shares
      outstanding used for basic net
      income (loss) per common share                11,808,306        11,659,890

     Dilutive effect of common stock
      options and warrants
      outstanding                                           --           738,282
                                                  ------------       -----------

    Weighted average common and
      common equivalent shares outstanding
      used for diluted net income
      (loss) per common share                       11,808,306        12,398,172
                                                  ============       ===========

      Comprehensive Income (Loss)

      In 1998, the Company adopted Statement of Financial Accounting Standards
      No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130
      establishes standards for reporting and presentation of comprehensive
      income (loss) and its components in a full set of general--purpose
      financial statements that is presented with equal prominence as other
      financial statements. Comprehensive income (loss) consists of net income
      (loss) and unrealized holding gains and losses from investment. The
      adoption of SFAS No. 130 had no impact on total stockholders' equity and
      the comprehensive income (loss) amounts are presented on the accompanying
      Consolidated Statements of Stockholders' Equity. There were no other
      comprehensive income items for the year ended December 31, 1997. The
      comprehensive income adjustments for the year ended December 31, 1998
      relate to an unrealized loss on an investment and the reclassification for
      losses on investment realized in net income (loss).

      Segment Disclosures

      Effective January 1, 1998, the Company adopted Statement of Financial
      Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
      and Related Information" (SFAS No. 131). SFAS No. 131 superseded SFAS No.
      14, "Financial Reporting for Segments of a Business Enterprise." SFAS No.
      131 establishes standards for the way that public business enterprises
      report information about operating segments in annual financial statements
      and requires that those enterprises report selected information about
      operating segments in interim financial reports. SFAS No. 131 also
      establishes standards for related disclosures about products and services,
      geographic areas, and major customers. The Company operates in one
      industry segment and, accordingly, the adoption of SFAS No. 131 had no
      effect on the Company.


                                      F-9
<PAGE>
 
      Supplemental Cash Flow Information

      Cash paid during the years ended December 31, 1998 and 1997 for income
      taxes were approximately $3,000 and $8,000 respectively.

      Reclassifications

      Certain prior year balances have been reclassified to conform to current
      year presentation.

3. INVESTMENT:

      In 1997 the Company did not receive the scheduled payments on the note due
      from the purchaser of FMT, ABS Group, Inc. (ABS). ABS acquired all of the
      outstanding common stock of FMT for cash and a note. On December 31, 1997,
      the Company agreed to exchange the note of $225,000 and related accrued
      interest of $13,000 for 300,000 shares of common stock of ABS, which are
      subject to certain restrictions. The common shares received were recorded
      at an amount equal to $434,687 which represented the closing bid price per
      share with a minimal discount due to the restrictions regarding the
      ability to sell these shares. As a result, as required by SFAS No. 115,
      the Company recorded a gain on this transaction of $196,687.

      Pursuant to SFAS No. 115 this investment has been classified as available
      for sale and during 1998 the unrealized holding losses were recorded as a
      separate component of stockholders' equity. During the first half of 1998,
      the trading price for ABS stock declined and the trading price was
      consistently at a reduced level for the second half of 1998. As a result,
      pursuant to SFAS No. 115, the Company has determined that this decline in
      value is other than temporary and the cost basis of the ABS stock has been
      written down, with the writedown of $397,312 recorded as a realized loss
      from investment.

4. ACCOUNTS RECEIVABLE:

      Accounts receivable consisted of the following:

                                                          December 31,
                                                  ------------------------------
                                                     1998                1997
                                                  ----------          ----------

                 Billed                           $2,534,283          $1,985,223
                 Unbilled                                 --             150,000
                                                  ----------          ----------

                                                  $2,534,283          $2,135,223
                                                  ==========          ==========

      No provision for uncollectible accounts was made in 1998 or 1997, as the
      Company considered all receivable balances fully collectible based on its
      historic bad debt experience and the financial stability of its customers.

5. LINE OF CREDIT:

      In 1997, the Company obtained a demand line of credit facility with a
      bank. Maximum borrowings under the facility are the lessor of $1,000,000
      or 75% of eligible accounts receivable, as defined, and bear interest at
      the bank's prime rate plus 1.0%. There were no outstanding borrowings
      under this facility in 1998 or 1997


                                      F-10
<PAGE>
 
6. STOCKHOLDERS' EQUITY:

      Common Stock Options

      The Company's 1996 stock incentive plan and 1995 employee stock option
      plan provide for the granting of incentive and non-qualified stock
      options for the purchase of shares of common stock to directors, officers,
      employees and consultants, as defined under the provisions of the plans.
      The Board of Directors determines the option exercise price per share,
      vesting period and expiration date (generally up to five years).

      The following table summarizes stock option activity:

<TABLE>
<CAPTION>
                                                                                Weighted
                                                                                Average
                                                                 Range of       Exercise
                                               Number of      Exercise Prices  Price Per
                                                Shares           Per Share       Share
                                                ------           ---------       -----
<S>                                            <C>              <C>              <C>  
Options outstanding at December 31, 1996       1,550,478        $ .03-$5.25      $2.05
   Granted                                       747,000         1.94- 4.16       2.07
   Exercised                                    (152,994)         .88- 1.00        .92
   Canceled                                      (17,500)        3.94- 4.63       4.28
                                               ---------
Options outstanding at December 31, 1997       2,126,984          .03- 5.25       2.12
   Granted                                     1,109,950          .69- 2.75       1.42
   Exercised                                    (315,484)         .03- 1.94        .32
   Canceled                                   (1,089,750)         .69- 5.13       2.10
                                               ---------

Options outstanding at December 31, 1998       1,831,700        $ .69-$5.25      $2.02
                                               =========        ===========

Exercisable options outstanding at:
    December 31, 1997                          1,354,859        $ .03-$5.25      $2.12
    December 31, 1998                          1,151,121        $ .69-$5.25       2.32
</TABLE>

      The following table summarizes information regarding stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                             Options Outstanding                                  Options Exercisable
    ------------------------------------------------------------------      -------------------------------
                                           Weighted          Weighted   
                                           Average           Average                           Weighted
                       Number              Remaining         Exercise     Number               Average
     Range of          Outstanding At      Contractual       Price per    Exercisable at       Exercisable
     Exercise Prices   December 31, 1998   Life in Years     Share        December 31, 1998     Price
     ---------------   -----------------   --------------   ---------     -----------------    -----------
     <S>                    <C>                 <C>          <C>               <C>              <C>   
               $0.69        524,750             4.6          $ 0.69            221,000          $ 0.69
     $ 1.00 -- $1.56        152,500             3.0          $ 1.22             95,500          $ 1.08
     $ 1.88 -- $1.94        402,250             3.9          $ 1.94            202,504          $ 1.94
     $ 2.00 -- $3.94        648,700             2.2          $ 2.74            531,117          $ 2.82
     $ 4.16 -- $5.25        103,500             1.9          $ 5.18            101,000          $ 5.19
</TABLE>                                                             


                                      F-11
<PAGE>
 
      At the Annual Meeting of Stockholders on May 21, 1998, stockholders
      approved the repricing of 1,199,000 options to the fair market value at
      the time of the repricing.

      As of December 31, 1998, there were 1,151,121 options vested and
      exercisable and 572,300 stock options available for grant under the
      Company's stock option plans.

      The Company applies Accounting Principals Board Opinion No. 25 "Accounting
      for Stock Issued to Employees" and the related interpretations in
      accounting for its stock option plans. The disclosure requirements of
      statement of Financial Accounting Standards No. 123 "Accounting for Stock
      Based Compensation" (SFAS No. 123) were adopted by the Company in 1997.
      Had compensation cost for options granted during 1995 through 1997 under
      the stock options plan been determined based upon the fair value of the
      options at the date of grant, as prescribed by SFAS No. 123, the Company's
      pro forma net income and pro forma net income per share would have been
      reduced to the following amounts:

<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                                       -------------------------------
                                                             1998             1997
                                                       --------------   --------------
       <S>                                             <C>              <C>          
       Net income(loss)                                $    (942,117)   $     252,696
       Pro forma net income (loss)                        (1,299,425)          15,481
       Basic income per share                                  (0.08)            0.02
       Pro forma basic net income (loss) per share             (0.11)              --
       Diluted net income (loss) per share                     (0.08)            0.02
       Pro forma diluted net income (loss) per share           (0.11)              --
</TABLE>

      The weighted average fair value of each stock options granted during the
      years ended December 31, 1998 and 1997 was $1.42 and $1.86 respectively.
      As of December 31, 1998, the weighted average remaining contractual life
      of each stock option outstanding was 3.4 years. The weighted average
      remaining contractual life of each stock option granted during the years
      ended December 31, 1998 and 1997 was 4.6 and 4.7 years, respectively. The
      fair value of each option grant is estimated on the date of grant using
      the Black-Scholes option pricing model with the following weighted
      average assumptions:

<TABLE>
<CAPTION>
                                                         Years Ended
                                                         December 31,
                                                         ------------
                                                    1998                1997
                                                    ----                ----
<S>                                            <C>                 <C>
 Risk - free interest rate                      4.1% - 5.7%         5.8% - 6.6%
 Expected dividend yield                                --                  --
 Expected life                                     5 years             5 years
 Expected volatility                                  40.0%               40.0%
</TABLE>

     Because additional option grants are expected to be made each year, the
     above pro forma disclosures are not representative of pro forma effects on
     reported net income for future years.

     In 1997, the Company granted 25,000 stock options to an independent
     consultant for which the Company recorded consulting expense based upon the
     value of the stock options under the provisions of SFAS No. 123.

     Common Stock Warrants

     In 1996, the Company issued 250,000 common stock warrants with an exercise
     price of $2.75 per share to an investment banking firm, and 100,000 common
     stock warrants with an exercise price of $5.25 per share to a financial
     consultant in connection with an offering of common stock. The


                                      F-12
<PAGE>
 
      warrants were vested on the grant date.

7. CUSTOMER INFORMATION:

     The following table summarizes significant customers with revenues in
     excess of 10% of total revenues (as a percentage of total revenues):

                                                        Years Ended
                                                        December 31,
                                                        ------------
                    Customer                         1998         1997
                    --------                         ----         ----
                    A                                24%           14%
                    B                                22%           21%
                    C                                16%           15%
                    D                                12%            *
                    E                                10%            *
                    F                                 *            20%
                    G                                 *            19%

     * Revenues were less than 10% of total revenues.

      The above revenue amounts consist of separate clinical trials ranging from
one to five.

8. INCOME TAXES:

      The components of the income tax provision (benefit) are as follows:

                                                       Years Ended December 31,
                                                       ------------------------
                                                       1998              1997
                                                       ----              ----
             Current:
                Federal                              $      --           $    --
                State                                       --            15,392
                                                     ---------           -------
                                                            --            15,392
                                                     ---------           -------

             Deferred:
                Federal                               (382,000)            3,827
                State                                       --               596
                                                     ---------           -------
                                                      (382,000)            4,423
                                                     ---------           -------
                                                     $(382,000)          $19,815
                                                     =========           =======


                                      F-13
<PAGE>
 
      Income tax expense differs from the amount currently payable because
      certain expenses, primarily depreciation and accruals, are reported in
      different periods for financial reporting and income tax purposes.

      The federal statutory income tax rate is reconciled to the effective
      income tax rate as follows:

                                                        Years Ended December 31,
                                                        ------------------------
                                                           1998        1997
                                                           ----        ----

       Federal statutory rate                             (34.0%)      34.0%
       State income taxes, net of federal
         benefit                                             --         6.6
       Nondeductible investment loss                        5.2          --
       Prior period net operating loss                       --       (34.6)
       Other                                                 --         1.3
                                                         ======      ======

                                                          (28.8%)     7.3 %
                                                         ======      ======

      The components of the net current and long-term deferred tax assets and
      liabilities, measured under SFAS No. 109, are as follows:

                                                             December 31,
                                                             ------------
                                                          1998           1997
                                                          ----           ----
       Deferred tax assets -
          Net operating loss carryforwards             $ 506,320      $ 220,684
          Credit carryforwards                            19,493             --
                                                       ---------      ---------
                                                         525,813        220,684
                                                       ---------      ---------

       Deferred tax liabilities -
          Investment valuation                                --        (78,675)
                                                       ---------      ---------
          Depreciation                                   (50,574)       (50,069)
                                                       ---------      ---------
                                                         (50,574)      (128,744)
                                                       ---------      ---------

            Net deferred tax asset                    $(475,239)      $  91,940
                                                      =========       =========

      Based on an assessment of the Company's taxable earnings history and
      expected future taxable income, management has determined that it is more
      likely than not that the net deferred tax assets will be realized in
      future periods. The Company may be required to provide a valuation
      allowance for this asset in the future if it does not generate sufficient
      taxable income as planned. Additionally, the ultimate realization of this
      asset could be negatively impacted by market conditions and other
      variables not known or anticipated at this time.

9. EMPLOYEE BENEFIT PLAN:

      The Company sponsors a 401(k) plan covering substantially all employees.
      Eligible employees may contribute up to 15% of their annual compensation
      to the plan. The Company does not match employee contributions.


                                      F-14
<PAGE>
 
10. LEASE COMMITMENTS:

      The Company leases office facilities and other equipment under
      noncancellable operating leases expiring through December 2001. Rent
      expense was $294,387 in 1998 and $289,308 in 1997. Future minimum annual
      rental commitments under the noncancellable lease obligations are $257,836
      in 1999, $245,413 in 2000, and $245,413 in 2001.


                                      F-15
<PAGE>
 
                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                          COVALENT GROUP, INC.

Dated:    3/31/99
                                            By:  /s/ Bruce LaMont
                                             -----------------------------------
                                                Bruce LaMont, President, Chief 
                                                Executive Officer and Director

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Dated:     3/31/99
                                          By:  /s/ Bruce LaMont
                                             -----------------------------------
                                                Bruce LaMont, President, Chief 
                                                Executive Officer and Director
Dated:     3/31/99
                                          By:  /s/ William K. Robinson
                                             -----------------------------------
                                                William K. Robinson, Chief  
                                                Financial Officer and Director
Dated:     3/31/99
                                          By:  /s/ Ivan Rubin
                                             -----------------------------------
                                                Ivan Rubin, Director
Dated:     3/31/99
                                          By:  /s/ John Whittle
                                             -----------------------------------
                                                John Whittle, Director
Dated:     3/31/99
                                          By:  /s/ Kenneth M. Borow
                                             -----------------------------------
                                                Kenneth M. Borow, Director